Proskauer’s Mungovan: Dodd Frank Is The “End Of The Beginning”

The U.S. Securities and Exchange Commission may be turning its lens on the private equity industry, but private equity firms and the attorneys that advise them have been bracing for heightened regulation under the Dodd Frank Act for more than a year. Dodd Frank has been a boon for private equity law firms, according to a survey of law firms conducted by for the March issue of the Private Equity Analyst. Many of the firms give credit to Dodd Frank for increased business in 2011. Private Equity Beat recently caught up with Timothy Mungovan, a litigation specialist at Proskauer Rose to get his thoughts on regulation, litigation and what may lie ahead for private equity firms.

How concerned should private equity firms be about this informal inquiry launched by the SEC?

Mungovan: I think the inquiries being made around valuation in my view are more related to the overall effort by the regulators to understand the private equity industry more completely. That effort is driven by the success of the industry over the last 25 years. The industry has enjoyed explosive growth, and it is now maturing, so the effort by regulators to understand the industry more fully is a natural byproduct.

What types of dispute involving private equity firms have commonly lead to litigation?

Mungovan: Because many private equity funds are first generation businesses there are sometimes disputes over control and succession to the next generation of partners. There are disputes between investors and the general partner. Often those are at the end of a fund’s life [and involve] the disposition of the final sets of assets or holdings. I wouldn’t call it common but those disputes do arise. My expectation is that given the growth of the number of funds, you will see continued disputes in those areas. Do I expect the growth rate of disputes to outstrip the growth rate of the industry? No.

What other regulatory and legal issues will private equity firms need to deal with this year?

Mungovan: In my perspective Dodd Frank is not the end. It’s the end of the beginning of a regulatory regime that will be instituted in the capital markets generally, including in the private equity industry. By itself the Dodd Frank Act as it affects the private funds industry is really just an effort to map the industry through information gathering. What the regulators do with that information remains to be seen. I would expect over time, there will be a new set of regulations and maybe even statutory enactments that impose additional duties and obligations on the private funds space. The historical analogue is the public equities market in the 1930s [with the Securities Act of 1933 and the Securities Exchange Act of 1934]. In my view, that regulatory regime allowed the capital markets to flourish because it created confidence. While regulation can be a negative thing, if it’s done well and done with some restraint, in the long run, it can be positive.